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Comment by ok_craig | Hacker News Reader

Can anyone inform us on why there is such a law as "a factory cannot own a store" in the first place?

These laws were established in the 1930s when factories would establish franchisees in (what was to them) low-value regions. As they grew more valuable, they would move into the region with factory-owned dealerships & start gouging franchisees. Since then, lobbying power has undoubtedly extended dealership power further than what's generally beneficial. But the starting point, it seems to me, made sense.

For a fairly balanced (but not up-to-date as far as the status of legal challenges) starting point: http://autos.yahoo.com/blogs/motoramic/tesla-plans-short-cir...

"But the starting point, it seems to me, made sense."

It doesn't make sense to me. This could be handled with contracts, not laws. When signing a franchise with a factory, you stipulate that they can't enter your market or otherwise infringe on your territory by doing ___________.

It's a perfectly fine contract clause that unnecessarily turned into a law.

If you can't see why that makes sense, I'm concerned for you. You may disagree that it's the right approach, but to say it's not sensible strains credulity. (As to the idea that individual contractors were well-enough connected with each other to guard against the manufacturer's ability to screw them seems unlikely in 1930...but your foray into anarcho-syndicalism hardly seems the point of this thread, aye?)

They weren't individual contractors, they were wealthy dealership owners, and the proof that they were well connected in their local communities is the effectiveness of their lobby, which created these restrictions in the first place.

http://www.econtalk.org/archives/2009/06/munger_on_franc.htm...

The problem is that during the initial phase of expansion into a virgin territory, it's in the franchisee's short-term interest to compete with other franchisees by omitting that clause. This is to the longer-term detriment of all franchisees.

If you consider that it's in the interest of society to promote a broader prosperity instead of repeated grassfires, then you pass this sort of law regulating commerce. Otherwise, you just end up with a patchwork of factory stores and bankrupt ex-franchisees, along with underserved regions of greater poverty.

The problem with the legislative solution is that all that code is undocumented, thus outliving its original purpose and unbalancing market systems two generations down the road.

"code is undocumented" great term to use for laws.

I see what you're saying about the interest of the society needing to step in to force the clause instead of relying on the two parties to include it. Can't say I agree yet but it's given me something to think about.

Why is the longer-term detriment and bankruptcy of franchisees worse for the broader prosperity of society? If the car manufacturers could undercut them if it weren't for these laws, aren't they just extracting potential customer surplus and transferring it to the franchisees?

And why would some regions be underserved? If they were profitable enough to open a franchise before, what would change?

Regarding your last point, the undeserved areas aren't initially profitable. In the feared scenario, the franchisee spends money to develop that market, expecting to make a profit in the long run. The franchisee is taking a risk on this market. This law is meant to protect that risk and keep the dealer from jumping into the market after the franchisee spent their own money to develop it.

If you consider that a cornerstone of economics that a economic risk is rewarded when it turns out to have been a good idea, the actions of the dealers undermine the principle. The factory pawns the risk off to a franchisee, until it is shown that the risk is lower than they thought. Then they deprive the risk takers of the reward, or even the ability to pay off the financial burden of taking risk. It harms broader society by discouraging entrepreneurial activity - it stagnates the generation of new business because there is no chance of payoff to anyone who isn't an established player.

Essentially without the protections, the factories found a way to get the reward without the risk.

That's only true if dealerships are a pure commodity, with no first-mover advantage or way for dealerships to differentiate themselves besides price. I'm fairly ignorant about the issue, but I find that idea extremely unlikely.

A franchisee pays the manufacturer a license fee. They get a discount from the list price on the product, but that price is still higher than the manufacturing cost.

So consider what you're suggesting...

A manufacturer has costs of X, and will sell the good in the market for X + M (markup).

The franchisee will purchase the goods from the manufacturer and sell them for X + M + L(license fees per unit) + DM(dealer markup).

So while the manufacturer receives M + L for profits (and could match the dealer prices to receive as much as M + L + DM).. the franchisee receives only DM.

So what you're suggesting is that with the dealers lower profit margin, they could somehow provide better service than the manufacturer (that the manufacturer will not be able to match or exceed).

That is tough. Probably even impossible. Service costs money.

You can s/ dealers and franchisees with just about any other field containing pioneers and establishments, which suggests to me the reasoning might not be sound.

Specifically, it just seems that historically franchisees made a bet they had a competitive advantage, and bet wrong. So they codified their position into law instead. Given the expense and scumbaggery of franchise car dealers, I think a lot of people feel the industry could use a "grassfire".

In this particular case, yeah, I think a grassfire is long overdue (like the California chaparral - suppress the fires long enough and you end up burning three counties at a time).

But there are times and places where fire prevention is considered a good thing.

Replace car franchise with YouTube and and factories with content creators. Now imaging that Google wants to push laws so that content creators cannot build their own video sites but instead must be licensed to sites like youtube for the simple reason that youtube was a huge and risky investment. If it sounds ridiculous for Google to do the same thing that dealers did why should the dealers be able to do it?

Not the same thing. The product is not the videos, it's the ads. A more appropriate analogy would be Google selling other video sites access to the ad serving technology, then when that site becomes popular, creating special youtube sub-site that serves identical videos, and telling ad purchasers they can buy ads on the new youtube sub-site for $X or on the other site for $y where $x < $y.

The analogy breaks down here, because IP, licensing and so on interfere with direct analogy.

I believe it was because it would be unfair for a factory to begin to compete with its already franchised locations.

Solution: don't enter into the franchise business, or enter with a clear contract including compensation in case the factory starts direct competition with its franchises.

But to block a factory from selling its own products unless they go through a middleman, it's absurd. Especially if the plaintiffs didn't operate a Tesla franchise.

What you describe is basically how the alcohol industry has functioned in this country since the end of prohibition. All sales are forced to go through distributors who then sell to stores who then sell to consumers. There is no purpose for this other than another level of bureaucracy, waste, and limiting of competition.

You can't buy wine at the cellar door?

http://en.wikipedia.org/wiki/Three-tier_%28alcohol_distribut... "States have various exceptions to this rule, the most prevalent one being the case of a brewpub, which is simultaneously a producer and retailer, and has no requirement to sell to a distributor. Some states allow an entity to have a part in two of the tiers, letting small breweries act as their own distributor, for example. Many states permit wineries to sell bottles of wine on-site to customers."

I wouldn't say it severe no purpose other than bureaucracy, waste and limiting competition.

My understanding was that the 3 tiered system came about as a method to closely monitor and control alcohol sales. For example, medicinal brandy was still legal during prohibition and much of it was diverted for recreational use. Tightly controlling manufacturers, distributors and retailers helped keep that sort of stuff under control (kinda of... not really).

I don't disagree that it serves a very limited purpose now.

Yeah I definitely don't agree with it - and in Tesla's case since there were no franchises it isn't even relevant. This was an obvious case of the current car companies fearing competition.

The current car franchise system sucks (which Tesla is acutely aware of) and with selling something new requires a good team to do it.

I have an example first hand when I went to check out the Volt after it first launched. I kept hearing the advertising saying its 'range' which confused me since I thought the gas generator could power the electric motor after the batteries were exhausted and you could just refill the gas. I started thinking maybe the gas generator could only extend the range or something (the internet wasn't clear since things were new).

When I went to the Chevy dealers they were worse than useless, they knew nothing about the volts they had and what they did tell me ended up being wrong. It turned out the advertised range was just terrible marketing.

That story isn't unique to the Volt. In my experience, sales people rarely know the details of the products they sell. Best Buy is a classic example when the sales people tend to read the box for answers to questions. Of course, you'd think that an expensive product, like a car, would be different, but its not. It goes to show how sales is about so much more than the product itself.

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